What's the Difference Between Overbilling and Underbilling?

By Martin · Updated 2026-02-02
Overbilling (billings in excess of costs) occurs when you've billed more than your earned revenue — creating a liability on your balance sheet. Underbilling (costs in excess of billings) occurs when you've earned more revenue than you've billed — creating an asset. Overbilling improves short-term cash flow but creates future obligations; underbilling hurts cash flow but represents money you're owed.

Why This Matters

Every construction company lives in the gap between earning revenue and collecting cash. Understanding overbilling and underbilling is critical because they have opposite effects on your cash flow, balance sheet, and bonding capacity.

I've watched contractors get addicted to overbilling because it feels good. Cash is flowing, the bank account looks healthy. Then six months later they're scrambling because they owe work they've already been paid for, and there's no cash coming to fund it. That's when companies blow through their line of credit and start missing payroll.

Your surety watches your net over/under position like a hawk. Too much overbilling and they see risk. You've borrowed against future performance. Too much underbilling and they see inefficient collections. Either way, it affects your bonding capacity.

How It Works

Let's walk through a clear example with a $1,000,000 contract:

Scenario 1: Overbilled Position

You've collected $500K but only earned $400K. The extra $100K creates a liability on your balance sheet called "billings in excess of costs" or "deferred revenue." You owe $100K worth of work. When you perform that work, you won't bill for it because you've already been paid.

Scenario 2: Underbilled Position

You've earned $600K in revenue but only billed $450K. The $150K difference is an asset on your balance sheet called "costs in excess of billings" or "unbilled receivables." You're owed this money. When you submit your next pay app, you should be catching up on these billings.

The Real-World Impact

Here's what happens in practice. You land a $2 million job. The contract lets you bill 25% upfront for mobilization. You submit a $500K invoice and get paid. Great start.

But you've only mobilized and done $150K of actual work. Your WIP shows:

That $350K sitting in your account isn't profit. It's an obligation. Over the next 6-9 months, you'll be doing work you won't be billing for. If you're not careful, you'll spend that cash on overhead or other jobs, then struggle to self-fund the completion of this one.

Now flip it. You're running a T&M job with monthly billing. You do $200K of work in March but don't submit your invoice until April 15th. By the time it's approved and paid, you're 60 days out. Your WIP shows a growing underbilled position. You've funded this work from your own pocket, and it's killing your cash flow.

Common Mistakes

The worst mistake is front-loading billings without planning for the cash cliff. Contractors see that mobilization payment as found money and spend it. Then reality hits around 60-70% completion when they're doing expensive work with no cash coming in.

Smart contractors manage this deliberately. If you're going to overbill early (and many contracts encourage it), set that cash aside. You'll need it to finish the job. Think of it as a zero-interest loan from your client, not a windfall.

On the flip side, chronic underbilling means you're acting as your client's bank. You're funding their project with your working capital. If you're consistently underbilled across multiple jobs, you're tying up cash that could be used for bonding capacity, equipment, or other opportunities.

The second mistake is not watching your net over/under position. You might have three jobs overbilled and two underbilled. Individually they look okay. But net them together. If you're $800K overbilled across the company, that's a problem. You owe $800K worth of work that won't generate corresponding cash. Your bonding company will cut your capacity accordingly.

The Bottom Line

Overbilling is not inherently bad. Underbilling is not inherently bad. What's bad is not understanding which position you're in, not planning for it, and not managing cash accordingly.

Track your net over/under position monthly. If you're heavily overbilled, you need a plan to fund completion of that work. If you're heavily underbilled, you need to tighten up your billing cycles and collect what you're owed.

Your WIP report tells the story. Your balance sheet shows the impact. Your bank account feels the reality. Understanding the difference between overbilling and underbilling means you'll see the cash flow problems coming before they hit.

And that's the difference between growing and scrambling.